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Investments
April 28, 2022

Are You Suffering From Investing Winner’s Curse?

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After several years of strong returns, recent negative market performance has given many investors a reality check. Some areas in particular, such as the US stock market, ‘growth’ companies and the technology sector were assumed by some to be on a permanent upward trajectory. On the flip side, other areas such as the UK stock market, out-of-favour ‘value’ companies and the energy sector were widely viewed as has-beens.

Markets, however, have a wicked way of reminding us there are no such thing as investment winners or losers – only things that do well or poorly for a given period of time. Nothing is permanent in investing. Today’s ‘winners’ could be tomorrow’s ‘losers’ and vice versa. That’s why it’s important to remember past performance really isn’t a guide to future returns.

Let’s take a look at why investing only in past top-performers could actually hold back your investment returns – investing’s own “winner’s curse”.

The Trend Is Not Your Friend

Equities vs bonds. Growth vs Value. USA vs rest of the world. Technology vs everything else. These are some of the regular investment debates we hear among everyday and professional investors alike. Which one is best? Which to invest in? In the absence of a reliable crystal ball though, the answer is no one really knows.

So what many resort to is to look at which ones have performed the best and worst, and then invest in the former and avoid the latter. If only investing was as easy as buying top performers though. Unfortunately for trend-chasers, performance charts often end up being turned upside down, as the table below shows.

Each colour in the table represents a different stock market sector, and each column shows the performance ranking by year with the biggest gainers at the top.

Past performance is not a guide to the future. Source: FE Analytics. Data in USD terms * to 31/3/22

Although it might look like a patchwork quilt of random colours, that’s sort of the point. As you can see, no area stays where it is for long. In some cases the very best or worst performers one year end up at the opposite end of the table the next. Only investing in what’s performed well recently then may leave you wishing you hadn’t.

What A Difference A Decade Makes

But what about over the longer term you might be asking? Surely if something proves itself over several years that confirms it’s a winner, right? Unfortunately though, that’s not true either.

Had we been looking back on the last 10 years of stock market performance a decade ago, trend-followers would have been raving about the growth potential of Asia and the developing world, given China had delivered a 364.1% return, emerging markets 275.1%, and Pacific ex Japan 220.3%. The US wouldn’t even bear thinking about in comparison, with its 10-year return of just 42.6% - the worst of the major markets.

Those investors would also likely have been piling into the Energy (largely oil and gas) and Materials (chemicals, metals, mining) sectors with their table-topping returns. While the Technology and Health Care sectors, occupying two of the three worst performing spots over those 10 years, wouldn’t have even got a look in.

Fast forward to today though, and the picture is completely different. Those previously best performing regions and sectors have all delivered among the worst – if not the very worst – returns over the most recent ten years. Those that were previously the worst performers, on the other hand, produced chart-topping gains.

Past performance is not a guide to the future. Source: FE Analytics. Data in USD terms to 31/3/22

Past performance is not a guide to the future. Source: FE Analytics. Data in USD terms to 31/3/22

So over the long term too, the ‘winner’s curse’ of investing heavily in the top-performing areas can leave you ruing your investment decisions.

Our Approach

There is no guarantee that any area of investing will continue to perform the same in the long-run as it has done recently. All past performance does is to tell you how something has performed, not how it will perform. It may seem like an obvious thing to say, but you can’t invest in past performance.

It’s almost impossible to predict what will be the investing ‘winners’ and ‘losers’ in the years to come, over both the short and long term. That’s why we think the best approach is not to try, and instead invest in all the different styles, sectors and regions all of the time. That way you’re not having to guess what to invest in and when, and you get exposure to whatever is topping the charts at any given time.

Written By
Nikita Maxwell
Investment Analyst
Disclosure

Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.

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